Is It Time to Drop Your Rental Rates?
Pricing for short-term rentals is both an art and a science. Figuring out an appropriate pricing strategy is a bit like a science experiment, but there’s not much room for failure; missing out on reservations because your rates are too high, or booking too many reservations at too low a rate, impacts the bottom line of the homeowner, the manager or host, and the destination. This makes pricing especially tricky during periods of uncertainty, like the one we are in now. Will vacation rental revenues be similar to 2022 or will they decline? Are travelers more price-sensitive? The answers to these questions are nuanced but greatly affect revenue management strategies. To help managers and hosts understand the impacts of rate changes, we can look at the fourth quarter of 2022, which is when the tide really started to shift.
A Look at Q4 2022
During the fourth quarter of 2022, occupancy returned to more normal seasonal patterns and was 4% lower than in 2021 for the average professionally-managed United States short-term rental that was active during the final quarter of both 2022 and 2021. The average daily rate increased by an average of 1%, a much more moderate increase than during other parts of the year. The decline in adjusted paid occupancy drove adjusted RevPAR, or the average revenue generated per available night, down by an average of 5.6%.
While the average rental generated less revenue than in 2021, this trend was not ubiquitous. 37% of the properties we studied had a higher adjusted RevPAR in Q4 2022 than in 2021 and their year-over-year increases were substantial at 28%. What will help you get into this semi-exclusive club and become one of the property managers, hosts, or owners making more money?
Finding The Right Price
Right now, everyone is talking about pricing. Lower occupancy rates and increasing price sensitivity of travelers would imply that it’s time to reduce nightly prices. However, reducing prices may not improve occupancy to the point that nightly revenue increases. Raising rates could help protect RevPAR from impending occupancy declines. But, if prices are pushed too high, they could discourage enough potential guests that RevPAR still declines. It’s a tricky balance and management companies are clearly torn on what approach to take.
During the fourth quarter of 2022, 50% of United States short-term rental properties in our study had higher average daily rates, by an average of 19%, than in the fourth quarter of 2021. The other half were priced lower by an average of -16%. Of course, not every destination saw declining rates and not all were evenly split. To understand how pricing strategies played out for different types of destinations, let’s analyze three top leisure markets. In Baldwin County, Alabama, home to Gulf Shores and Orange Beach, their strong shoulder-season performance allowed the average daily rate to increase and 64% of properties had higher rates during Q4 2022 than in 2021. In Sevier County, Tennessee, (Gatlinburg and Pigeon Forge) and Summit County, Colorado, (Breckenridge, Frisco, Keystone, and Copper Mountain) about two-thirds of properties had lower average daily rates than in 2021.
The impact of nightly rates on occupancy is not always clear-cut. Lower nightly rates don’t guarantee increased occupancy because other factors are also at work, including supply and demand. In fact, for the properties we analyzed, there was a relatively small relationship between the year-over-year change in the average daily rate and the change in the adjusted paid occupancy rates. Rate increases were correlated with decreased occupancy, but the rate only explained a small part of the change in occupancy.
For United States rentals during Q4 2022, increased rates made the unit more likely to have lower occupancy. Of properties with higher rates, 70% had lower occupancy and occupancy declined by an average of 18%. For the half of all properties with lower rates, occupancy increased by an average of 5% and there was still a 50% chance that occupancy would fall. In Summit County, Colorado, 62% of units with lower rates than 2021 had lower occupancy. Even more important than the impact of rates on occupancy is how those two metrics worked together to impact revenue.
Measuring Rates with Adjusted RevPAR
Adjusted RevPAR is the best key performance indicator for understanding the impact of rate changes on the bottom line. For Q4 2022 in the United States, 50% of all properties had lower average daily rates than in 2021 and their average rate decrease was -16%. While this did correspond with an average increase in adjusted paid occupancy of 5%, it was not enough to make up for the rate decline and adjusted RevPAR increased by an average of 13%. For the 50% of U.S. properties that increased their rates, occupancy declined by an average of 13%. The 19% average rate increase made up for lower occupancy and adjusted RevAR increased by 2%.
While increasing rates did not guarantee increased RevPAR and some properties with lower rates still increased their RevPAR, raising rates was likely to lead to a more favorable outcome. The potential payoff was larger and the potential decline was smaller for properties with higher rates. Notably, the price or bedroom count of the property did not impact the change in RevPAR; luxury or budget properties performed similarly.
Higher rates improved outcomes for the U.S. as a whole and in each of the three counties. In Summit County, Colorado, only 27% of properties performed better than the market average year-over-year change in RevPAR. Of those, 60% had increased rates. On the other hand, 84% of those that lowered rates underperformed the market. One of the main factors is the difference in the amount of occupancy increase required to increase RevPAR between pricing strategies.
In Sevier County, Tennessee, the average adjusted paid occupancy increase for units with higher rates that outperformed the market RevPAR was only 2%. In comparison, the average change in occupancy for units who lowered rates but still beat the market’s change in RevPAR was +52 year-over-year. Raising rates means you don’t have to increase occupancy by as much, as long as you don’t raise rates to the point where occupancy declines precipitously. At some point, rates have increased too far and occupancy drops enough that RevPAR declines. For the United States last quarter, the rate increase that maximized RevPAR was around 6%, higher than that and RevPAR began to decline.
Should You Raise or Lower Vacation Rental Pricing?
Of course, raising rates improves your odds of winning but doesn’t guarantee it. In some markets, the margin between the percentage of units that increased their rates and beat the market and those that did the same but lost to the market was narrow. In Summit County, 52% of those who raised rates still lost to the market. However, it’s still often a better strategy than lowering rates. Also in Summit County, 84% of the properties with lower rates than in 2021 lost to the market. In Baldwin County, Alabama, where higher rates were the norm, 46% of those who raised rates lost to the market, which is still better than 62% of those who lowered rates.
While we can see that increased rates can often lead to better outcomes, it's understood that there is a lot of nuance and expertise involved in making the rate change. A lower rate may have been the right call for your property in your market. Pricing is tricky to figure out but knowing the position of your property within the market, having an accurate competitive set, and tracking your market’s data will improve your chance of winning. Your revenue management strategy should also be paired with dynamite marketing, operations, and owner management strategies to ensure you stay ahead as we move into 2023. Want to learn more about how to utilize your past results and future projections for data driven insights? Get in contact with us.